Back-to-School Tax Tips

Tuesday August 9, 2005

Back-to-school season is a great opportunity to go shopping, get organized, and focus on learning new things. But going back to school may also mean important tax breaks.

For starters, you are eligible for valuable tax credits if you or your children attend college. Sorry, no tax credits for high school and elementary school children. What this means is that sending your kids to college, or going back to school yourself, can definitely pay off come tax time.

Here's the details:

You can claim a tax credit worth up to $1,500 for students attending their first two years of college (the Hope Credit). Otherwise you can claim a tax credit worth up to $2,000 (the Lifetime Learning Credit).

The Hope Credit is definitely the best tax credit available. You get the maximum credit of $1,500 if you spend $2,000 or more in tuition expenses. You should plan ahead for the Hope Credit. I have seen parents lose out on this valuable credit because the student can no longer be claimed as a dependent on the parent's tax return.

The Lifetime Learning Credit is possibly the best deal in the tax code, simply because so many people can take advantage of it. You receive a tax credit of 20% of your tuition expenses, up to a maximum tax credit of $2,000. This translates into tuition expenses of $10,000. You can claim the Lifetime Learning Credit for anyone on your tax return (yourself, your spouse, your dependents) if they attend at least one college class. Taking a class to advance your career, learn a new language, or explore a favorite subject can be a smart tax move.

There's also the Tuition and Fees Deduction. You don't need to itemize to claim this deduction; instead the deduction goes on page 1 of your 1040 where it reduces your taxable income. You can deduct up to $4,000 in tuition expenses.

Calculating which tax benefit delivers the biggest refund can be tricky. That's because the Hope Credit, Lifetime Learning Credit, and Tuition Deduction phase out over various income levels, depending on your marital status. For married taxpayers, the education tax credits will start to phase out if your income is over $85,000. And the Tuition Deduction is cut in half (to $2,000) if your income is over $130,000. Fortunately, most tax software will calculate which tax benefit is most advantageous for you.

Anyone who has their tax credits or deduction eliminated by the phase-outs should consider itemizing their education expenses. Education related to your career can be itemized on a Schedule A. In fact, certified public accountant James Vonachen recommends itemizing the cost of an MBA and other professional degrees.

What about some tax breaks for parents of high school and elementary school children? You won't find any tax credits or deductions, but there are still some ways to reduce your taxes. First, consider making tax-deductible charitable contributions to the school. Be careful if you send your kids to a private school. Pay charitable donations separately from tuition, and make sure that you receive a letter from the school acknowledging your donation. You can donate goods and supplies instead of cash. Just be sure to keep a list of the items you donated and their fair market value.

Some other tax-savvy tips for parents: many states offer sales-tax-holidays to encourage shopping during the back-to-school season. This won't impact your tax return, but it will help stretch your back-to-school budget. Finally, consider purchasing scrip to help raise money for schools. Some supermarkets even donate a percentage of your sales to the school of your choice. This can turn your ordinary shopping habits into a fundraising effort of your child's school.

Teachers also have a special tax break. They can deduct the cost of classroom supplies – up to $250 per year – directly from their income. And they don't need to itemize. They take the deduction directly on page one of the 1040. Any amount spent on classroom supplies over $250 can be itemized on Schedule A as a job-related expense.

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